Monday, June 27, 2011

Another preemptive Share Price Alert, this time for The Warehouse Group Ltd [WHS.NZX].

The stock price has taken a dive of 23c over the last 2 weeks of June and finished trading down 2c to close at $3.43 at close of business last Friday.

The stock has previously found support around these levels at least 5 times over the last year (see 1 year chart above).

In an interesting turn of events late on Friday though, incoming CEO for Woolworths Ltd [WOW.ASX] Grant O'Brien, let it slip at while addressing members of the New Zealand Food & Grocery Council in Auckland that his company was still interested in acquiring additional shares in the big red retailing icon.

This of course changes everything and while the spectre of the Warehouse has been handing over its head for almost 5 years, this new indication from one of two possible bidders ups the ante again.

The two bidders paid between 5-6 bucks approx for their respective 10% shareholdings, so any value from a bid from Woollies would have to come north of the higher figure.

In the Sixth Grant Thornton Report (A 7th is due at the end of June) it outlines the detail of the SFO case thus far and is a good starting point for prosecution purposes:

On Aorangi Securities Ltd: “The amount due to investors is $96 million. The preliminary estimate of the realisable value of the portfolio is in the range of approximately $87 million to $97 million.

Based on these estimates, investors could suffer a loss and Mr Hubbard would receive no money from Aorangi. No interest would be paid with realisations at this level.”

On Hubbard Management Funds: “The report states that some shares recorded as belonging to HMF are subject to possible claims from others. They say shares have been pledged as security to financiers for borrowings made by Mr Hubbard or parties related to him.

As previously stated, statutory managers’ reconciliation as at 31 March 2010 indicates that there were insufficient assets to provide investors the investments noted on their statements. There were also investments that were not allocated to investors and some valuations that, in the statutory managers’ opinion, were incorrect.

Once all adjustments and corrections were processed, the shortfall of assets compared with the investor statements is estimated at about $31 million.” Sixth Grant Thornton Report

So here we have a "shortfall" of $31 million for HMF and a reasonable chance of recovery with Aorangi. In relation to the facts as stated above we now come to how and why some of the above occurred.

Under the Crimes Act 1961 Mr Hubbard has been charged with more than 50 counts of fraud and the SFO have outlined why they are charging and what for:

"Crimes Act 1961

Section 220 - Theft by person in special relationship

(1) This section applies to any person who has received or is in possession of, or has control over, any property on terms or in circumstances that the person knows require the person—(a) to account to any other person for the property, or for any proceeds arising from the property; or

(b) to deal with the property, or any proceeds arising from the property, in accordance with the requirements of any other person.

(2) Every one to whom subsection (1) applies commits theft who intentionally fails to account to the other person as so required or intentionally deals with the property, or any proceeds of the property, otherwise than in accordance with those requirements.

(3) This section applies whether or not the person was required to deliver over the identical property received or in the person's possession or control.

(4) For the purposes of subsection (1), it is a question of law whether the circumstances required any person to account or to act in accordance with any requirements.

Section 242 - False statement by promoter, etc

(1) Every one is liable to imprisonment for a term not exceeding 10 years who, in respect of any body, whether incorporated or unincorporated and whether formed or intended to be formed, makes or concurs in making or publishes any false statement, whether in any prospectus, account, or otherwise, with intent—

(a) to induce any person, whether ascertained or not, to subscribe to any security within the meaning of the Securities Act 1978 ; or

(b) to deceive or cause loss to any person, whether ascertained or not; or

(c) to induce any person, whether ascertained or not, to entrust or advance any property to any other person.

(2) In this section, false statement means any statement in respect of which the person making or publishing the statement—

(a) knows the statement is false in a material particular; or

(b) is reckless as to the whether the statement is false in a material particular.

Section 260 – False accounting

Every one is liable to imprisonment for a term not exceeding 10 years who, with intent to obtain by deception any property, privilege, service, pecuniary advantage, benefit, or valuable consideration, or to deceive or cause loss to any other person,—(a) makes or causes to be made, or concurs in the making of, any false entry in any book or account or other document required or used for accounting purposes; or(b) omits or causes to be omitted, or concurs in the omission of, any material particular from any such book or account or other document; or(c) makes any transfer of any interest in a stock, debenture, or debt in the name of any person other than the owner of that interest". Crimes Act 1961

So Mr Hubbard has been charged with false accounting, false statements and Theft by a person in a special relationship. These relate to instances of forged signatures, failure to do adequate paperwork, omissions in paperwork, failure to disclose business relationships in relation to insider lending, failure to provide adequate information on which investors can make clear decisions on investing with Hubbard etc.

The evidence for prosecution is very clear, it just has to be proven in court, if it gets that far.

I am picking the SFO will pursue the false accounting, false statements made as a promoter and the theft charges as they appear to be the most serious charges laid.

These are very serious charges and any one count alone if found guilty would be enough for a suitably serious sentence.

Sunday, June 26, 2011

Incoming CEO of Woolworths Ltd [WOW.ASX] Grant O'Brien let it slip at while addressing members of the New Zealand Food & Grocery Council in Auckland last Friday that his company was still interested in acquiring additional shares in the The Warehouse Group Ltd [WHS.NZX]

"We would very much like to be a larger owner of The Warehouse" and "It is a business that is of interest to us."and if you didn't get it the first two times, "It's a terrific business and it's a business ... that we're happy to be a part owner of..." NZ Herald, 25 June 2011

Subtlety is clearly not one of Mr O'Brien's traits but I guess these comments must be put in the context of an address that was much longer than these throw away lines and focusing on Woolworth's interests as a whole in this country rather than just on Wow's holding in the WHS.

The company is apparently interested in increasing the size of their business in New Zealand via the expansion of its Countdown supermarket brand and a full takeover of the Warehouse would be able to achieve part of that plan as the Warehouse have key stakes in retail sites that are hard to find in established areas.

There are of course several impediments to Woolies making a full takeover offer, not the least of which is their main competitor in this country, Foodstuffs, owning a 10% stake in WHS themselves, a similar sized stake to Woolworths.

There is still some argument over whether either Foodstuffs or Woolies have clearance to make a takeover for the red sheds. The last the market knew where the state of play on this was back in August 2008 when Woolworths decided to seek leave from the Supreme Court to appeal the decision of the Court of Appeal setting aside clearance for Woolworths to acquire The Warehouse. There has been no indication from Woollies as to whether they did get around to seeking leave and in the absence to the affirmative we must conclude that no filing has been made.

Having said that, the Commerce Commission, who blocked Woolies and Foodstuffs in the Court of Appeal stated back in October 2008 that Woolies simply needed to just re-apply to the commission rather than pursue the Court of Appeal decision in the Supreme Court. This was in the light of The Warehouse dropping their "extra" format stores which was the key reason why the commission gave for blocking a sale.

Another possible impediment would be Warehouse founder Stephen Tindall and his nearly 53% stake. Negotiations with him over price would have to start on the high side and his full support would be crucial to a successful takeover.

A full takeover offer is possible, contrary to what other business media are saying. Foodstuffs blocking stake of 10% means the threshold for compulsory takeover that is reached with 90% of shareholder acceptances is a key block to Woollies making a full bid for the company but the right pressure (from some of the possible scenarios below)and the right price might see Foodstuffs fold in the light that the company is under intense financial pressure and even more intense competition from their rival. I know this is a big stretch given that it would allow Woollies to almost double their retail footprint in this country but anything is possible.

The 10% stake that Foodstuffs owns may be able to be got around another way though, so my opinion again differs from other market commentators on this. According to the Takeovers Code a partial offer can be made for the target company of over 50% and if over 50% is not achieved shareholder approval can be made for acceptances under 50%.

This would allow any bidder to effectively take control over the company and make it difficult for other major shareholders like Foodstuffs to remain owners.

A bidder can also buy shares on-market up to a 20% stake without triggering any takeover play.

I have written extensively on this over the last five years since the first interest in buying a stake in the company came from Foodstuffs back in 2006 and have always been keen to hold onto my shares for the long-term. Given the poor performance of the company under current management, overseen by outgoing CEO Ian Morrice, my opinion now is that the company needs new direction, new life and probably a new owner and its stagnation as a business cannot be sustainable in the long run.

As much as I hate to say it, bring on the Aussies, they just maybe the saviour of this once great kiwi retail icon.

Lets hope if they do make a bid though that they do not get a bargain!

Saturday, June 25, 2011

The Share Investor Portfolio was down in the forth week of June. The portfolio slumped by 2.22% or $5996.41 on the June 17 update . For the first 24 weeks of 2011 the portfolio has increased by 11.45 % or $28895.42 . This weeks fall was due to medium drops throughout the portfolio. WHS was down 8c, SKC down 3c and FRE down 23c were the biggest contributors and other stocks fell less and make up a smaller part of the portfolio so had less impact. The only stock to contribute significantly in a positive way was MFT, which was up 5c.

The total of unspent dividends and interest in the bank as at 26 May from the 2010 - 2011 earnings years is $25382.95 at close of reporting season for 2010 and at the end of the 2011 1st half reporting year. There are also approx $55000.00 in tax credits earned from the portfolio since it began in late 2002.